Asphalt Binder Asphalt base is also a product of crude oil refining and is used to...

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Asphalt Binder Asphalt base is also a product of crude oil refining and is used to make a product called binder that is shipped out as a finished product from the Asphalt Division of MesoPetrolia. The binder product is sold to construction companies and is added to aggregate (sand-gravel) on construction sites to make roads. This Asphalt Division prefers to purchase raw asphalt base from Murad's Division but can buy their raw materials from a different supplier for $1.15 per litre. They could be persuaded to offer Murad the same price but will not pay more. Similarly, Murad prefers to sell to their in-house Asphalt Division, but can sell to international asphalt makers on the open market. The conversion cost of turning asphalt base into binder is $0.15 per litre and asphalt binder is sold by the barrel for $320 per barrel. Question 3. What is the total cost to produce a litre of asphalt base assuming $75 per barrel cost for crude? What would be the contribution per litre for Murad's Division and the Asphalt Division respectively if Murad set the transfer price at cost? What would be the contribution per litre for Murad's Division and the Asphalt Division if they set the price at $1.20 per litre. Create a chart to display the above information. Asphalt Binder Continued The marketing team forecast potential sales on the market in Exhibit 2. Question 4. Assuming your answers to Question 3 are correct and using Exhibit 2, make a recommendation of how much asphalt base should be sold in-house and at what price. Question 5. Assume Murad is only allowed to sell in-house and the transfer price is set by head office at $1.30 per litre. Assume that crude barrel prices are $75 and these prices are fixed. If Murad wants a 10% margin, what will be the target cost for the conversion costs per litre at the refinery? Question 6. Assume that your answer to Question 4 is correct. Murad could hire a new sales agent who would increase demand to $1.50 per litre for the entire amount of asphalt base produced annually. The agent would take a 5% sales commission and a $100,000 base salary and $20,000 in one time product training. Perform an incremental analysis assuming your answer to Question 4 is the status quo. Total Costs The costs detailed in the previous paragraphs are standard costs, however Murad had gathered some actual cost information and more details about the standard costs in Exhibit 3. 2 Do not change any solutions to previous questions (1-6) related to this new information. Exhibit 1 How oil is refined Distillation tower gasoline vapors LPG naphtha kerosene diesel distillate medium weight gas oil heavy gas oil " unit cracking units residuum coker End products LPG reformer akylation gasoline jet fuel diesel fuel LPG gasoline motor gasoline jet fuel diesel fuel industrial fuel asphalt base For simplicity, MesoPetrolia only produces gasoline, jet fuel and asphalt base. 3 https://www.cer-rec.gc.ca/en/data-analysis/energy-markets/market-snapshots/2018/market-snapshot- how-does-refinery-turn-crude-oil-into-products-like-gasoline-diesel.html 4 Exhibit 2 Expected sales price and external demand forecast First 50,000 litres Next 50,000 litres Next 50,000 litres Next 50,000 litres All remaining litres $1.50 per litre $1.35 per litre $1.20 per litre $1.10 per litre $.95 per litre Standard and real cost information Item Crude Barrels Processed Gasoline Produced Jet Fuel Produced Asphalt produced Crude Barrel Price Direct Labour OH Costs (details below) Depreciation Repairs Exhibit 34 Standard 1 million barrels 500,000 barrels 300,000 barrels 200,000 barrels Weighted Average $85 per barrel $4.5 million $80 million $50 million Real 800,000 barrels 360,000 barrels 280,000 barrels 160,000 barrels Weighted Average $80 per barrel $5 million $91 million $50 million $2 million $ 5 million Inventory Storage $18 million $18 million Administrative $4 million $10 million Environmental fees $3 million $11 million This exhibit is only used for question 7 MesoPetrolia Refinery Naziha Murad runs a very large refinery in the Majnoon oil fields of Iraq. The refinery is a division of MesoPetrolia, which removes crude oil from the land through their Extraction Division, and refines and sells products through Murad's Division (Refinery Division), and sells to internal and external buyers. An example of an internal buyer was the Commercial Asphalt Division. Murad's Refinery Division can purchase crude oil from the in-house Extraction Division or third-party sellers in the region, the same way they can sell to internal or external buyers. Refining oil involves heating the crude oil to separate out components based on their boiling points, see Exhibit 1 for more information on oil refinement. Murad's Refining Division heats and separates the crude oil. Then they can sell the petroleum products to various distributors such as gas stations, jet fuel firms, and asphalt producers. In Murad's Division, 48% of crude oil becomes gasoline, 34% becomes jet fuel, and 18% goes into asphalt production. Murad's refining facility typically processes 1 million crude oil barrels per year. The production process uses little direct labour, but Murad attributes $4.8 million of direct labour per year to the barrel loaders who empty crude oil barrels into the refinery process and allocates these direct labour costs proportionally to product outcome. The total overhead cost of operating the refinery is $78 million per year which also would be distributed proportionally to product outcomes. Jet Fuel MesoPetrolia sells jet fuel directly to Erbil International Airport's fuel service business. This fuel is then sold to various airlines and local pilots. Given demand in the market, Murad feels they could price the fuel using total cost + pricing. Question 1. Create a chart exploring what prices to set for all combinations of the products under the following scenarios: The price per barrel of crude oil could be $65, $85, or $100 per barrel. The desired margins to evaluate for each price is Cost + 10% and Cost + 20%. Please indicate in your chart your initial finding for total cost per litre in the chart under each potential scenario. Jet Fuel (Continued) Murad has the opportunity to invest in a filtration system to increase the purity of the kerosene used in the jet fuel. This would enable a higher price from the buyers. Currently Murad is able to charge a 10% margin into the price using total cost + pricing (Assume your answer from Question 1 for crude oil cost of $85/barrel is the current price), but with this change he would be able to charge a 30% markup on the original total cost (Assume your answer from Question 1 is correct). This would take an investment of $9 million dollars for equipment lasting four years and an annual operating expense for the filters of $950,000. In addition, each litre of jet fuel needs a trace amount of stabilizer added that costs $0.40 per litre. Question 2. Perform an incremental analysis on switching to the filtration system assuming that the 10% margin price from Question 1 is the current status quo. Please also examine the scenarios for barrels being $65 per barrel and $100 per barrel. One barrel of crude oil is equivalent to 160 liters. Asphalt Binder Asphalt base is also a product of crude oil refining and is used to make a product called binder that is shipped out as a finished product from the Asphalt Division of MesoPetrolia. The binder product is sold to construction companies and is added to aggregate (sand-gravel) on construction sites to make roads. This Asphalt Division prefers to purchase raw asphalt base from Murad's Division but can buy their raw materials from a different supplier for $1.15 per litre. They could be persuaded to offer Murad the same price but will not pay more. Similarly, Murad prefers to sell to their in-house Asphalt Division, but can sell to international asphalt makers on the open market. The conversion cost of turning asphalt base into binder is $0.15 per litre and asphalt binder is sold by the barrel for $320 per barrel. Question 3. What is the total cost to produce a litre of asphalt base assuming $75 per barrel cost for crude? What would be the contribution per litre for Murad's Division and the Asphalt Division respectively if Murad set the transfer price at cost? What would be the contribution per litre for Murad's Division and the Asphalt Division if they set the price at $1.20 per litre. Create a chart to display the above information. Asphalt Binder Continued The marketing team forecast potential sales on the market in Exhibit 2. Question 4. Assuming your answers to Question 3 are correct and using Exhibit 2, make a recommendation of how much asphalt base should be sold in-house and at what price. Question 5. Assume Murad is only allowed to sell in-house and the transfer price is set by head office at $1.30 per litre. Assume that crude barrel prices are $75 and these prices are fixed. If Murad wants a 10% margin, what will be the target cost for the conversion costs per litre at the refinery? Question 6. Assume that your answer to Question 4 is correct. Murad could hire a new sales agent who would increase demand to $1.50 per litre for the entire amount of asphalt base produced annually. The agent would take a 5% sales commission and a $100,000 base salary and $20,000 in one time product training. Perform an incremental analysis assuming your answer to Question 4 is the status quo. Total Costs The costs detailed in the previous paragraphs are standard costs, however Murad had gathered some actual cost information and more details about the standard costs in Exhibit 3. 2 Do not change any solutions to previous questions (1-6) related to this new information. Exhibit 1 How oil is refined Distillation tower gasoline vapors LPG naphtha kerosene diesel distillate medium weight gas oil heavy gas oil " unit cracking units residuum coker End products LPG reformer akylation gasoline jet fuel diesel fuel LPG gasoline motor gasoline jet fuel diesel fuel industrial fuel asphalt base For simplicity, MesoPetrolia only produces gasoline, jet fuel and asphalt base. 3 https://www.cer-rec.gc.ca/en/data-analysis/energy-markets/market-snapshots/2018/market-snapshot- how-does-refinery-turn-crude-oil-into-products-like-gasoline-diesel.html 4 Exhibit 2 Expected sales price and external demand forecast First 50,000 litres Next 50,000 litres Next 50,000 litres Next 50,000 litres All remaining litres $1.50 per litre $1.35 per litre $1.20 per litre $1.10 per litre $.95 per litre Standard and real cost information Item Crude Barrels Processed Gasoline Produced Jet Fuel Produced Asphalt produced Crude Barrel Price Direct Labour OH Costs (details below) Depreciation Repairs Exhibit 34 Standard 1 million barrels 500,000 barrels 300,000 barrels 200,000 barrels Weighted Average $85 per barrel $4.5 million $80 million $50 million Real 800,000 barrels 360,000 barrels 280,000 barrels 160,000 barrels Weighted Average $80 per barrel $5 million $91 million $50 million $2 million $ 5 million Inventory Storage $18 million $18 million Administrative $4 million $10 million Environmental fees $3 million $11 million This exhibit is only used for question 7 MesoPetrolia Refinery Naziha Murad runs a very large refinery in the Majnoon oil fields of Iraq. The refinery is a division of MesoPetrolia, which removes crude oil from the land through their Extraction Division, and refines and sells products through Murad's Division (Refinery Division), and sells to internal and external buyers. An example of an internal buyer was the Commercial Asphalt Division. Murad's Refinery Division can purchase crude oil from the in-house Extraction Division or third-party sellers in the region, the same way they can sell to internal or external buyers. Refining oil involves heating the crude oil to separate out components based on their boiling points, see Exhibit 1 for more information on oil refinement. Murad's Refining Division heats and separates the crude oil. Then they can sell the petroleum products to various distributors such as gas stations, jet fuel firms, and asphalt producers. In Murad's Division, 48% of crude oil becomes gasoline, 34% becomes jet fuel, and 18% goes into asphalt production. Murad's refining facility typically processes 1 million crude oil barrels per year. The production process uses little direct labour, but Murad attributes $4.8 million of direct labour per year to the barrel loaders who empty crude oil barrels into the refinery process and allocates these direct labour costs proportionally to product outcome. The total overhead cost of operating the refinery is $78 million per year which also would be distributed proportionally to product outcomes. Jet Fuel MesoPetrolia sells jet fuel directly to Erbil International Airport's fuel service business. This fuel is then sold to various airlines and local pilots. Given demand in the market, Murad feels they could price the fuel using total cost + pricing. Question 1. Create a chart exploring what prices to set for all combinations of the products under the following scenarios: The price per barrel of crude oil could be $65, $85, or $100 per barrel. The desired margins to evaluate for each price is Cost + 10% and Cost + 20%. Please indicate in your chart your initial finding for total cost per litre in the chart under each potential scenario. Jet Fuel (Continued) Murad has the opportunity to invest in a filtration system to increase the purity of the kerosene used in the jet fuel. This would enable a higher price from the buyers. Currently Murad is able to charge a 10% margin into the price using total cost + pricing (Assume your answer from Question 1 for crude oil cost of $85/barrel is the current price), but with this change he would be able to charge a 30% markup on the original total cost (Assume your answer from Question 1 is correct). This would take an investment of $9 million dollars for equipment lasting four years and an annual operating expense for the filters of $950,000. In addition, each litre of jet fuel needs a trace amount of stabilizer added that costs $0.40 per litre. Question 2. Perform an incremental analysis on switching to the filtration system assuming that the 10% margin price from Question 1 is the current status quo. Please also examine the scenarios for barrels being $65 per barrel and $100 per barrel. One barrel of crude oil is equivalent to 160 liters.